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Arnold M. Knightly

Forbearance deals give casinos, creditors time

22 April 2009

LAS VEGAS, Nevada -- The recession was supposed to have sent several debt-heavy gaming companies that have been teetering on the edge of bankruptcy over that cliff by now.

Mostly that hasn't happened yet. Instead, creditors are keeping Station Casinos and other casino companies on a short leash as the financially troubled businesses continue to negotiate terms of their financial restructuring following a default, most likely in bankruptcy court.

But why do these negotiations drag on for months?

Station Casinos received its second 30-day extension, called a forbearance agreement, from its lenders and bondholders on April 14.

The locals casino company, which first announced in early February that it planned to file a prepackaged bankruptcy plan, now has until May 15 to negotiate the terms of the bankruptcy or seek another extension from its creditors.

Barbara Cappaert, a bond analyst with KDP Investment Advisors, said the second forbearance agreement did not surprise her. She believes Station Casinos will seek another extension beyond the May 15 date.

But Station Casinos is not the only gaming company operating under forbearance agreements.

Mesquite-based operator Black Gaming entered a forbearance agreement in November and continues to talk to its lenders about renegotiating its $188.7 million in debt which carries near double-digit interest rates.

Herbst Gaming operated under a forbearance agreement from May 15 until it filed for Chapter 11 bankruptcy March 22, after more than 10 months of discussions that ended with the company agreeing to give up ownership of its 15 casinos while retaining control of its Nevada slot routes.

Hooters Hotel and Riviera Holdings Corp. are negotiating with their lenders after defaulting on debt loads, but neither has announced a forbearance agreement.

Diane Fearon, chief executive officer and president of Bank of George, said granting forbearance agreements can allow time for an orderly restructuring plan without the extra cost of an extended bankruptcy court fight.

Also, neither the creditors nor the borrower are sure how a bankruptcy judge might rule during a court restructuring.

"If the borrower and lender agree as to the ultimate best outcome, and both are acting in good faith, then utilizing a forbearance agreement and coming up with a revised plan for payment of the most amount of money the lender is willing to see in return out of a variety of scenarios, that can be beneficial to all parties," said Fearon, who is not involved in the Station Casinos negotiations. "Without agreeing to forbearance, you either then force the hand of filing for bankruptcy before you or the borrowers had the opportunity to explore all avenues."

Forbearance agreements preserve defaults, but creditors agree not to proceed with a bankruptcy of a foreclosure during the time frame of the agreement.

A waiver, however, removes the default and restores the debtor to a predefault condition.

Fearon said the use forbearance agreements has increased with the recent economic downturn. She said the use of forbearance agreements was rare during the past 20 years.

Mel Jameson, the associate dean for graduate program research in the finance school at the University of Nevada, Las Vegas, said creditors use the extra time forbearance agreements give to weigh all of their options, including determining how much value could be recovered if the company is forced into bankruptcy.

Creditors often decide they can get a little more in the long run by keeping companies out of bankruptcy and waiting until the economy rebounds and their cash flow situation improves.

"It's mainly just a business matter," Jameson said of forbearance agreements. "Yes, (the creditors) have the right to put them into bankruptcy, but the creditors are thinking the way things are now, we just might as well string them along for a little while thinking you'll get more of a return on the bonds that way. It's all part of the negotiation."

Jameson compared the situation that Station Casinos is operating under to that of General Motors Corp. and Chrysler LLC.

The companies can use the threat of bankruptcy as a club to try to get concessions from their creditors.

Publicly, little seemed to change in the negotiations with Station Casinos' second forbearance agreement.

Lori Nelson, corporate communications director for Station Casinos, said April 14 that the company is still trying to negotiate a prepackaged bankruptcy under the terms first announced in early February.

The terms of the proposal, which asks investors holding $2.3 billion in bonds to accept between 10 cents and 50 cents on the dollar in cash and new notes as part of a prepackaged Chapter 11 bankruptcy, remain unchanged.

Under the plan, the company would enter a voluntary Chapter 11 bankruptcy and the gaming company's owners -- the Fertitta family and real estate investment firm Colony Capital -- would put $244 million in cash into the company.

A bankruptcy filing can also change the game for both the company and its creditors.

In Station Casinos' case, for instance, it could mean losing control of much of the gaming company's properties.

After Station Casinos announced its prepackaged bankruptcy proposal, Boyd Gaming Corp. made an unsolicited nonbinding offer to acquire most of Station's assets for $971 million.

While Nelson reiterated last week that Station Casinos remains uninterested in talking to Boyd about its offer, Jameson said that could change if negotiations with its bondholders stall.

"You may be put in a situation where something that previously looked unattractive becomes the best alternative or acceptable," he said. "You can't use coercion for something like that."

A bankruptcy judge could also force the sale of company assets if companies are forced to file for bankruptcy without a prepackaged agreement between the companies and their creditors.

Craig Unterberg, a partner in the Dallas-based law firm Haynes and Boone, said, generally speaking, the fact that creditors have been granting forbearance agreements usually indicates some progress is being made in negotiations.

"The company has told the lenders they can accomplish something within a certain period that will make the lenders satisfied to either waive the previous default or be able to get out of the loan," said Unterberg, who co-authored an article about forbearance agreements in last month's Texas Lawyer journal. "Forbearance agreements are usually a way to allow a borrower to facilitate what they're promising the bank to do with the bank having a short fuse on their ability to get it done."

The use of forbearance agreements has been increasing as the number of borrowers that default under debt agreements increase, Unterberg wrote with co-author Scott Night.

"A previously prized borrower that once could dictate terms to its lender likely will find itself with fewer options when facing a default and will be forced to work with its existing lender to obtain a waiver or a forbearance agreement," the article read.